Biweekly vs. Monthly Mortgage Payments: Which Saves More?
When it comes to paying off your mortgage faster and saving money on interest, one of the most effective strategies is adjusting your payment frequency. The two most common options are biweekly payments and monthly payments. But which one is more beneficial in terms of savings and overall cost? This article explores the pros and cons of biweekly versus monthly mortgage payments and helps you decide which method will save you more money in the long run.
1. How Monthly Mortgage Payments Work
A monthly mortgage payment is the traditional payment method. Each month, you pay the same amount for your mortgage, which includes both the principal (loan balance) and the interest. The loan term typically lasts 15 to 30 years.
Key Features:
- Payment Frequency: Once per month.
- Payment Amount: Fixed monthly payment, which typically stays the same throughout the loan period.
- Total Payments Per Year: 12 monthly payments.
2. How Biweekly Mortgage Payments Work
A biweekly mortgage payment involves making half of your monthly mortgage payment every two weeks. Instead of paying one full payment each month, you make smaller payments twice a month. This method results in 26 biweekly payments, which is equivalent to 13 full payments in a year, instead of the usual 12.
Key Features:
- Payment Frequency: Every two weeks (26 payments annually).
- Payment Amount: Half of your regular monthly payment made every two weeks.
- Total Payments Per Year: 13 full payments (versus 12 for monthly payments).
3. The Impact of Biweekly Payments on Loan Amortization
The primary benefit of biweekly mortgage payments is that you make one extra payment per year, which can significantly reduce the length of your loan and the total amount of interest paid.
How It Works:
With biweekly payments, each year you pay an extra payment toward your principal balance. This means you’re paying down your mortgage faster.
For example, on a 30-year mortgage, by paying an extra full payment every year, you can reduce the term of your loan by about 4 years and save thousands of dollars in interest over the life of the loan.
Effect on Interest:
By paying down your loan balance faster, you reduce the amount of interest accrued over time.
The faster you pay off the principal, the less interest you pay because the interest is calculated based on the remaining balance.
4. Comparing Savings: Biweekly vs. Monthly Payments
Let’s break down how much you could potentially save by switching from monthly payments to biweekly payments.
Example 1: Monthly vs. Biweekly Payments on a $250,000 Loan
For a 30-year fixed-rate mortgage with a 4% interest rate, here’s what the savings could look like:
- Monthly Payment: $1,193.54 (principal + interest).
- Over 30 years, you would pay a total of $429,474 (including principal and interest).
- Biweekly Payment: $596.77 (half of the monthly payment).
- Over the course of the year, you will make 13 payments instead of 12.
- After 30 years, you’ll have paid off the loan in roughly 26.5 years, saving you about $31,000 in interest.
Example 2: Savings Calculation
- Loan Amount: $250,000
- Interest Rate: 4%
- Term: 30 years
- Monthly Payment: $1,193.54
- Total Paid over 30 Years (Monthly Payments): $429,474
- Total Paid over 30 Years (Biweekly Payments): $398,474
- Interest Savings: $31,000
5. Pros and Cons of Biweekly Payments
Pros:
- Faster Loan Repayment: By making one extra payment per year, your loan is paid off faster, which shortens the mortgage term.
- Interest Savings: Reducing the principal balance more quickly means you pay less interest over the life of the loan.
- No Major Lifestyle Changes: If your lender offers biweekly payment options, you can set it up easily without making any drastic changes to your lifestyle.
Cons:
- Lender Participation: Some lenders don’t offer biweekly payments or charge fees to set up a biweekly payment schedule.
- Extra Payment Per Year: While it’s the equivalent of one extra payment, it can feel like a financial burden, especially if you don’t budget for it.
- Doesn’t Work with All Loans: Biweekly payments are more beneficial for fixed-rate loans. If you have a variable-rate mortgage, the savings might not be as significant.
6. Additional Considerations Before Switching
- Budgeting for Extra Payments: Even though biweekly payments are split into smaller amounts, they still add up to an extra payment per year. Make sure you can comfortably manage the extra payment, especially if you have fluctuating income.
- Prepayment Penalties: Check if your lender charges prepayment penalties. Some lenders penalize borrowers for paying off loans early or making extra payments.
- Automatic Payments: Some lenders offer automatic biweekly payment plans, which help ensure that you make the extra payment every year without having to think about it. However, make sure this service is free of charge.
7. Is Biweekly Mortgage Payment Right for You?
The decision between biweekly and monthly mortgage payments depends on your financial goals and situation. If your main objective is to pay off your mortgage faster and save money on interest, biweekly payments are a solid strategy. The extra payment per year helps you pay down the principal faster, thus reducing your loan term and overall interest.
However, if your current financial situation doesn’t allow for the extra payment or your lender doesn’t offer a convenient option, monthly payments can still work effectively. You can always make extra payments on your own when you have the flexibility.
Conclusion
In most cases, biweekly mortgage payments are the more advantageous option for saving money on interest and reducing the overall term of your mortgage. By making one additional payment per year, you can pay off your mortgage earlier and save thousands of dollars in interest. Be sure to check with your lender about the availability of biweekly payments, and carefully consider your financial situation to ensure that this option is the right choice for you.